Brexit, Fintech and Big Data: Joining the dots in Ireland

It is fascinating how apparently unconnected points can be linked to reveal compliance challenges and opportunities. How, for example, does Brexit connect us to AML regulations, FinTech and Big Data in Ireland?

Trigger: Brexit and Financial Services Firms

Sometimes, events from outside the world of compliance can have a significant impact on regulatory compliance and financial crime compliance. Following the UK´s vote to leave the European Union in June 2016, various banks and financial services companies based in London are looking at relocating across EU member states to retain passporting rights and therefore access to the EU single market.

Ireland, as the only English speaking country left in the European Union post-Brexit, is a place where financial firms could find shelter. ‘Following Brexit, the UK’s authorised financial firms have been sending applications to relocate from London to Dublin,’ Cyril Roux, the deputy governor of the Central Bank of Ireland, confirmed. I think it is safe to assume that Roux senses a moment of great opportunity for Ireland.

Indeed, the Irish government has been working hard to promote Dublin as an attractive place for UK and international financial firms interested in access to EU single market. Dublin is already the home of ‘industry stalwarts such as Merrill Lynch, ABN Amro, J.P. Morgan’.But an increasing number of global firms such as Legg Mason and Barclays are considering Dublin for their new European headquarters.

Setting the stage: 4th EU Money Laundering Directive

The Irish government is also working to catch up with EU financial regulations such as the 4th EU Money Laundering Directive.

On 20th December 2016, the government approved the drafting of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill, which will transpose most of the provisions of the 4th EU Money Laundering Directive. This, ‘has the aim of strengthening laws in the EU to combat money laundering and terrorist financing”. The bill will also “align the provisions with the recommendations of the Financial Action Task Force (FATF)’.

Growing opportunities: FinTech and RegTech

In a previous article, we discussed Ireland as a global technology hub and, based on this, started a conversation about potential ethics and compliance risks in the ICT industry, beyond the classic topics of data privacy and data protection. Now, connecting seemingly unconnected points, we find that FinTech and RegTech are also potential assets for Ireland in the competition for EU financial market access after Brexit.

In recent years, the International Financial Services Centre (IFSC) of Dublin has been home to technology companies, ‘many of them exciting start-ups specialising in financial technology’ also known as FinTech. These technology-based competitors of traditional banks use Big Data and Data Science tools to provided cutting edge financial services. Within this segment, we also find RegTech businesses, software-based compliance solutions providers who help financial services firms to automate their regulatory compliance and financial crime compliance.

According to people familiar with the Irish FinTech environment, there is already a well-established FinTech base in the country:

Some leading multinational corporations have established Fintech Innovation labs in Ireland in recent years such as Accenture, Citibank, Liberty, MasterCard and Zurich. There are also numerous global Fintech companies who have established and strengthened their presence in Ireland over the past few years such as Elavon, First Data, Global Payments, PayPal, Stripe, Vesta and YapStone.

Big Data ethics and compliance risks

The use of large sets of data by disruptive FinTech or RegTech companies creates significant potential ethics and compliance risks in Europe. Not only are regulators increasing their scrutiny of new technology-based financial players, but there is also increased concern focused on the unethical use of big data and data science in the compliance industry.

Risk assessment around big data is being addressed by regulators such as the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pension Authority (EIOPA). In fact, these agencies, acting as the Joint Committee of European Supervisory Authorities (ESA), recently issued a discussion paper on the ‘Use of Big Data by Financial Institutions’.

The ESA committee has identified a wide range of potential benefits and risks related to the use of big data by financial institutions. The following is a summary of the main categories identified in the paper:

Market segmentation and discrimination

Personalisation and lack of transparency

Customisation and conflict of interest

Aggressive cross-selling practices and consumer protection

Wrong information about the consumer and/or biases

Profiling

Behavioural surveillance

Reputational damage

Clearly, the complexity of big data brings new categories of intrinsic ethics and compliance risk beyond mere ‘informed consent’ for the use of personal data. The Council of Big Data, Ethics and Society explains in its paper ‘Perspectives on Big Data, Ethics and Society’that:

as it becomes cheaper to collect, store, and re-analyze large datasets, it has become clear that informed consent at the beginning of research cannot adequately capture the possible benefits and (potentially unknown) risks of consenting to the uses of one’s data.

Among ‘potentially unknown risks’ raised by the use of big data, experts identify the risks of perennial surveillance, individual and group discrimination, predictive privacy harms and distributed groupings or classifications.

The lack of ethics and compliance culture among data scientists is also a matter of concern. The same paper indicates that computer science, physics and applied mathematics - three fundamental pillars of data science – ‘have long been considered outside of human-subjects-related ethics concerns because their work and contributions have historically been about systems and not people’.

Joining the dots

Brexit has already proved itself to be a major geopolitical event which has skyrocketed the regulatory uncertainty among financial firms based in the City. Some financial firms are looking at moving to Ireland in order to comply with EU regulations and therefore to legally sell their financial services and products into the single market. The Irish government is paving the way for UK financial firms to switch to Dublin, promoting the country as the only English speaking member left in the European Union. Also, the government in Dublin is in the process of implementing the 4th EU Money Laundering Directive, a clear move towards an enhanced regulatory framework. Ireland, as a global technology hub, is also home to disruptive data-driven Fintech and RegTech companies, operating in the financial market. Financial firms, including Fintech and RegTech companies, are facing tremendous new risks raised by Big Data.

These apparently unconnected elements, or ‘dots’ depict an emerging image of challenges and also opportunities in the regulatory compliance and financial crime compliance spaces for financial services firms who may be looking at moving to Ireland. This is a fascinating and changing environment with its own dots crying out to be joined on business objectives, rules and values. Taken as a whole, it offers a remarkable opportunity to increase compliance and business integrity, with Ireland firmly positioned at the emerging epicentre.